March CPI – all about fuel, too early for pass through
Headline March Quarter CPI 1.4%qtr/4.1%yr; Trimmed Mean 0.8%qtr/3.5%yr. Monthly March CPI 1.1%mth/4.6%yr, Trimmed Mean 0.3%mth/3.3%yr.
- Headline inflation being boosted by surging fuel prices.
- Core inflation was moderating before the Gulf Crisis and, at this stage, there is very limited sign of any passthrough to from higher fuel costs to broader price pressures.
- Today’s inflation update locks in a May rate increase and while we expect to see two more after this, a lot will depend on just how much demand destruction we see because of higher prices.
The CPI gained 1.4% in the March quarter, on par with market consensus and close to Westpac’s expectation of 1.46%. The annual pace of headline inflation, at 4.1%yr, is accelerating again; it was 2.1%yr in mid-2025 lifting to 3.6%yr in December. The acceleration through 2025 was mainly the unwinding of energy rebates but in early 2026 it is the crisis in the Gulf, and resulting surge in auto fuel prices, that is driving the acceleration. However, the cost-of-living assistance and surge in auto fuel has a limited impact on core inflation and so these measures take on more critical role in assessing the current pace of inflation.
The Trimmed Mean (TM) lifted 0.8% in the March quarter. Westpac and the market expected 0.9% (Westpac 0.93%). However, in our preview we highlighted that calculating the quarterly TM based on historical survey timing, which the ABS is doing given the short history for a number of series, pointed to a small downside risk to our estimate. The annual pace lifted very modestly from 3.4%yr to 3.5%yr.
The monthly trimmed mean increased 0.3%mth, which held the annual pace flat at 3.3%yr for the fourth consecutive month; the six-month annualised pace eased back a touch to 3.5%yr from 3.9%yr in December. It is worth noting that at this point in time the annual pace of the monthly CPI is tracking under that of the quarterly CPI.
Prior to the Gulf Crisis, the momentum in core inflation had been moderating.
The headline Monthly CPI lifted 1.1% in March to be up 4.6% in the year. This was quite a bit softer than our estimate of 1.3%mth/4.7%yr. Worthy of note was that auto fuel was softer than expected, lifting 32.8% vs. 36.4% expected. More concerning to the outlook for core inflation was that dwelling prices lifted 0.5% in the month compared to our expectation for a more modest 0.2% increase. The ABS did note this increase in the annual pace was due to project home builders raising base prices to pass through higher labour and materials costs over the year but made no comment on the monthly increase.
For the RBA, as noted by Westpac’s Chief Economist Luci Ellis in “RBA May hike locked in”, there was some scattered signs of pass-through to other prices, even though March was very early days for this to be evident and most likely it is business taking the opportunity to raise prices in front of looming cost increases. However, it was not widespread and as we covered before, electricity prices have benefited from Australian local gas prices separating themselves from global LNG prices (the local price is currently around $10/GJ so under the government’s proposed $12/GJ cap) and the rising share of renewables supported by storage which has seen lower than average summer electricity prices.
Nevertheless, we still expect the RBA to raise the cash rate at their May meeting. Given recent communication from the Bank has characterised the supply shock as ‘further exacerbating existing capacity pressures’ with future demand destruction just a possibility, we see two further interest rate hikes after May. It is true that the Trimmed Mean for the March quarter was on the RBA forecast of 3.5%yr but to achieve their estimate of 3.7%yr for the June quarter we will have to see a step down in the quarterly pace of 0.8%, a bridge too far we think given the current shock we are experiencing. Our current forecast for the June quarter Trimmed Mean is 1.0%qtr.
We are preparing a more detailed bulletin outlining any revisions to our inflation profile once we have processed all the quarterly and monthly data. But we can note that for the March quarter market services ex volatile inflation surprised with a flat print in the quarter with only a very modest lift in the annual pace to 3.4%yr from 3.3%yr. We are expecting it to pick up from here but due to modest wage outcomes, and better productivity in the market sector, we see this acceleration being capped around 4%yr in the second half of 2026, tracking the lift in Trimmed Mean inflation.
Below is the table comparing the quarterly details with our published estimates. We will cover the reasons for the small variations in our review of the monthly CPI as that is where the differences lie.
Monthly March CPI in more detail.
The Israel/US assault on Iran began in the morning of the 28th of February with most of the price and the resulting jump in auto fuel prices above $2/l occurred in the week ending the 8th of March. As such the March CPI would have been very early days for much pass-through to be evident. As noted in earlier bulletins we have recorded price increases for building products, but these did not take effect until 1st April.
Nevertheless, the March CPI did show some scattered signs of pass-through to other prices. Home building and vehicle repair costs, along with downstream insurance inflation, all picked up in the month. Services related to audio-visual, computing and telecommunications also increased in the month, which for telecommunications went against the run we have seen in recent months. There were some promising signs in softer monthly prices of appliances and some other household goods which we will be closely watching to see if they are reversed in the months ahead.
In terms of downside surprises in March, the largest was for auto fuel at 32.8% vs 36.4% expected. We expect fuel to be flat in April with prices falling through May due to the delayed impact of the excise cut and lower crude oil prices in monthly averages. If the excise cut is reversed on July 1, as currently planned, then auto fuel is set to surge 17% through the month of July.
Also, holiday travel was softer, –1.4% vs. 0.7% expected, on the back of a –2.2% decline in domestic travel.
Most other item outcomes were either close to our estimates or stronger. Housing overall was on par with our 0.2% estimate with a more modest than expected 0.2% increase in rents being offset by a 0.5% increase in dwelling costs. With rising inputs cost for construction this may be an earlier sign we should be expecting a stronger lift in dwelling prices in the months ahead.
Clothing & footwear (–1.9%) did not fall as much as expected (–4.2%) with garments having a smaller than expected seasonal fall (–2.5%) while footwear fell –1.9% and accessories & clothing services fell –0.6%. It does appear that the gold boost to accessories through jewellery may have come to an end with a reported –0.6% in March.
We also did not see the usual seasonal fall in alcohol (0.7% vs. –0.2%expected) which offset a softer than expected rise in tobacco (1.1% vs. 1.4%).
Communication prices lifted 0.5% in the month when we expected a small fall (–0.1%) due to an outsized 3.6% increase in postal services, the largest monthly increase since the 4.2% increase in July 2024.
With the rise in construction costs we will be keeping a close eye on insurance premiums. Insurance surprised us with a 0.7% increase in March following hot on the heels of a 1.4% increase in January and a 0.4% increase in February. Combined with a 0.9% increase in deposit & loan facilities and a 0.8% increase in other financial services, insurance & other financial services lifted 0.8% vs. 0.4% expected.
These small but reasonably broad upside surprises is something we will be watching closely in the months ahead to see if they are early signs of pass-through from higher fuel costs as well as opportunistic price increases give the current backdrop.
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